Starbucks Pushes Deeper Into China

It's branching out from the big cities to smaller markets

Having successfully targeted China’s major metropolitan centers, Starbucks (NYSE:SBUX) is now preparing to send its coffee-grind encrusted tendrils out from big cities like Shanghai into smaller markets.

Starbucks is already China’s largest coffeehouse chain. Taipei Times reported figures from Euromonitor International that found Starbucks had a commanding a 66.3% share of the market in 2010. Its primary competitors, McDonald’s (NYSE:MCD) and Britain’s Whitbread, both had less than 9% of the Chinese market, according to Euromonitor.

Starbucks expects to triple its existing number of Chinese stores, with a projected 1,500 in 70 Chinese cities (from a current 48) by 2015. The rollout would make China Starbucks’ second-biggest market after the U.S. Euromonitor noted that Chinese coffee drinkers represent a rapidly growing potential market, with the coffee shop market set to jump 55% to $714 million by 2015.

Speaking yesterday to the press at the Boao Forum for Asia in Hainan, China, Bloomberg Businessweek reported that John Culver, Starbucks’ president of China and Asia Pacific operations, said the drive to build up its customer base in China would help boost the company’s overall results. Culver pointed out that Starbucks’ China and Asian operations generated a healthy 34.6% operating margin during the last fiscal quarter, easily besting business in the Americas region, which posted a 21.8% margin.

Culver said China represented the region with the “highest financial return” potential for Starbucks. China/Asia-Pacific region revenues soared 38% during the first quarter to $166.9 million, driven by 85 recently opened coffee shops and a 20% rise in sales. By comparison, business in the Americas brewed up $2.6 billion in quarterly revenue.

“Over the 13 years we’ve been in China, we have been able to introduce the coffeehouse culture in China and it’s no different when we move into those cities where we don’t currently have stores,” Culver told reporters, according to The Financial. As Starbucks accelerates its Chinese expansion, it will also spend more money ramping up its infrastructure, Culver noted. While he didn’t provide a specific dollar amount, in 2011 the company formed a joint-venture with Ai Ni Group, a China-based coffee firm to acquire and transport arabica coffee grown in Yunnan province.

Starbuck isn’t the only coffee company that sees China as an important emerging market. In November, privately held, Italy-based Luigi Lavazza announced that it will open 200 coffee shops across China by 2014.